OPEC Meeting On Tuesday For Nothing

There is no reason for OPEC members to meet on Tuesday because the decision has already been made. There will be no change in the formal quotas and probably little whining about the barely 55% compliance with the current quota.

For the last couple weeks oil ministers from the various OPEC member nations have been all smiles. Crude prices continue to hold over $70 and cheating on the quotas has now extended to the cop on the beat.

Saudi Arabia is the largest OPEC producer and has in the past resorted to flooding the market with oil in order to punish other OPEC nations for not obeying quotas. As the largest producer they are seen as the 800lb gorilla and whatever they say OPEC normally follows.

Saudi announced a couple weeks ago they were going to start supplying 100% of orders to Asia and eliminate the cuts made last January to honor the quota reductions. When Saudi announced publicly it was going to cheat that was the green light for everyone else to cheat even more than what they had been doing.

This has led to a drop in compliance to the quotas to around 55%. This is down from just over 60% two months ago and 58% in November. This means there is an extra 2 million barrels per day being produced above the "official" limit. Since oil prices are holding over $70 it does not appear to be hurting prices.

We saw the price spike to nearly $75 on Friday after soldiers from Iran took over an oil well in a field that borders Iran. Soldiers in a 25-vehicle convoy captured the well and ran up the Iranian flag. After holding their position for 24-hours they broke camp and went back to Iran.

The two-part message was clear. First, Iran is always going to be your neighbor and you can't stop us if we wanted to take over your fields. Your American friends are going home and nobody will be here to protect you. This was a warning over the coming election to be careful whom you elect.

Secondly it was a warning over anyone attacking Iran over the nuclear issue. If Israel attacks Iran then Iran will attack the oil flow to the rest of the world. If the UN adopts more sanctions after year-end as expected Iran could penalize the world with higher oil prices.

Iran controls the Straits of Hormuz and even with the U.S. forces patrolling the gulf all Iran has to do is attack one freighter with a missile and no other freighters will risk making the passage.

This was a much more cleverly played card than the missile test earlier in the week. This is a threat they can actually succeed with while nobody takes their long-range missile threats seriously.

Oil prices had been bleeding off the weak dollar premium but the closer we get to 2010 we may start to see some Iranian security premium building.